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The Saga of Unilaterally appointed Arbitrators

Arbitration as a means of dispute resolution has gained widespread popularity amongst litigants over the past few decades. The main reasons for its widespread acceptability are due to timely rendering of decisions, confidentiality and flexible procedure adopted by the sole arbitrator or the tribunal.

It is also a preferred mode due to the availability of subject matter experts who can function as arbitrators. In National Court proceedings there is no element of choice in the appointment of Adjudicating Authorities, however in arbitration, the arbitrator or the tribunal is chosen by the parties to the dispute. In such a scenario it is but natural that there will always be an element of doubt as to the choice of the Arbitrators.

It is very much a germane issue, as recently the United States Supreme Court struck down the appointment of an arbitrator as the arbitrator had previously been an advisor to one of the parties to the dispute. In India also this problem persists, and in many cases the Supreme Court or High Court have had to strike down appointments of arbitrators on proven element of bias or even apprehension of bias.

It is said that Judges do the work of Gods, for the dispensation of Justice is indeed a godly function. Arbitrators are no different from Judges and hence they must be seen to be aboveĀ  Ceasars Wife as far as their independence and impartiality is concerned. Arbitrators are either chosen by both the parties to the dispute, or by an arbitration institute and in some cases they are chosen unilaterally by one of the parties to the dispute.

The problem arises when a sole arbitrator or an arbitral tribunal is chosen unilaterally by one of the parties to the dispute. Unilateral appointment is controversial because it does not take into account the wishes of the other party as to the sole arbitrator or arbitral tribunal, which leads to an apprehension of bias.

This article will attempt to elucidate the Law related to unilateral appointment in India as of today. It will also explore the questions whether to a party can unilaterally appointment an arbitral tribunal and whether such unilateral appointment prima facie will enable challenge to such appointment.

Unilateral Appointment Of Arbitrator Vis A Vis Arbitration Act, 1940

As regards this we have to ask ourselves what is the validity of arbitration clauses and arbitration agreements in the Arbitration and Conciliation Act of 1940. This question was raised before the Supreme Court of India in Dharma Prathishthanam v. Madhok Construction Pvt. Ltd[1]

Where the Court made the following observation:
A unilateral appointment and a unilateral reference - both will be illegal. It may make a difference if in respect of a unilateral appointment and reference the other party submits to the jurisdiction of the arbitrator and waives its rights which it has under the agreement, then the arbitrator may proceed with the reference and the party submitting to his jurisdiction and participating in the proceedings before him may later on be precluded and estopped from raising any objection in that regard.

The position which emerges from this dictum is that an unilaterally appointed sole arbitrator or arbitral tribunal can only continue to hold office if the other party has waived their objections to such appointment of sole arbitrator or arbitral tribunal. This observation although is of the 1940 arbitration act it remains pertinent till date due to the importance it gives to the mutual intention of the parties as regards the appointment of the arbitrator or arbitral tribunal.

Unilateral Appointment Of Arbitrators Vis A Vis 1996 Act:

The Arbitration and Conciliation Act, 1996 also did not give validation to unilateral appointment of sole arbitrator or arbitral tribunal. We will endeavour to explain the position of unilateral appointment in the 1996 Act through a decision of Prajakta Mahesh Joshi v. Rekha Uday Prabhu[2], wherein the Hon'ble Court was pleased to elucidate on the above mentioned aspect and made the following observations:- Considering the scheme and object of Arbitration Act, in my view, first requirement is that the Arbitrator must be appointed by the consent of the parties.

The consent of Petitioner was never obtained. Therefore, the unilateral appointment of Arbitrator, in such fashion itself is impermissible mode to resolve the disputes by this alternative dispute resolution mode through the Arbitrationā€¦It is contrary to the terms and the law. Apart from this clause, it is necessary for both the parties to appoint and/or nominate and/or select sole Arbitrator by consent. The appointment of the Arbitral Tribunal without consent itself was contrary to the agreed terms of the contract.

It can be thus concluded that Arbitration being wholly a creature of consent between contracting parties, if the arbitral tribunal has been constituted or the sole arbitrator has been appointed without the consent of the other party, then such appointment would be ex facie invalid under The Arbitration and Conciliation Act, 1996. The appointment of sole arbitrator or constitution of arbitral tribunal without the consent of the other party has never been considered a good practise, however due to lack of formal legislation in this regard the problem often persisted.

2015 Amendment Act

The 2015 Amendment brought in much needed changes to the arbitration landscape prevailing in the country. The Amendment incorporated a schedule to The Arbitration and Conciliation Act, 1996 , namely the 5th schedule drafted as per the UNICTRAL Model Law on International Commercial Arbitration which prescribe certain persons who will be barred from taking part in arbitration proceedings, if their relationship with the parties to the contract and counsels are established. In the following paragraphs of this article I will endeavour to analyse how the Courts have interpreted the amendments to The Arbitration and Conciliation Act, 1996.

TRF Ltd Vs Energo Engineering Products ( After Effects Of The New Amendment[3])

Facts:
Respondent Company was engaged in the business of procuring bulk material equipment for their thermal power station on behalf of NTPC and other PSUS. Disputes arose between the parties and appellant invoked the arbitration clause.

Sole Arbitrator was appointed by the Managing Director of the Respondent. A petition was filed in the High Court under Section 11 of The Arbitration and Conciliation Act, 1996 seeking appointment of independent arbitrator, as it was argued that sole power of appointment of arbitrator to the Managing Director was against the spirit of The Arbitration and Conciliation Act, 1996 and since as per the 2015 amendment Managing Director has been prohibited to act as an arbitrator, giving sole power of appointment to him would be ultra vires.

The High Court rejected the petition on the ground that nominee of the managing director was not barred from acting as arbitrator. Appeal was made to the Supreme Court of India.

Issue:- Can the Managing Director of an enterprise have unilateral power of appointment of arbitrator, despite such managing director being restrained from acting as an arbitrator as per the 5th schedule of The Arbitration and Conciliation Act, 1996?
Supreme Court:
The Supreme allowed the petition and remarked as thus:
The argument of the Respondent that the nominee of the Managing Director can function as arbitrator is not correct. It is the basic principle of Law in this country that what cannot be done directly, cannot be done indirectly also. The statutory bar to the Managing Director will stand extended to the nominee of such barred person also.

These observations of the Supreme Court in the above mentioned case is extremely pertinent. The Supreme Court has to some extent read in the Doctrine of Colourable Legislation into the folds of arbitration jurisprudence, because the said Doctrine prohibits the doing of acts through the backdoor, what cannot be done through the front door. Thus a basic tenet of Constitutional Law has now been recognized formally in arbitration jurisprudence government contracts which contain one sided arbitration clauses.

Perkins Eastman Architects Ltd v/s HSCC India[4]:

Facts:
Appellant was awarded a contract for designing of various hospitals under the Pradhan Mantri Swasthya Yojna. Disputes arose between the Petitioner and Respondent, and arbitration clause was invoked by the petitioners. Clause 24 of the contract contained an escalation mechanism for dispute resolution.

If there was an objection with regard to the decision of the HSCC they were required to approach the Chief General Manager of the HSCC, who had the sole discretion to appoint a sole arbitrator for adjudicating disputes between the parties. Disputes arose amongst the parties and the CMD appointed a sole arbitrator. His appointment was challenged in the Supreme Court, since it is an International Commercial Arbitration by filing a petition under Section 11 of The Arbitration and Conciliation Act, 1996.

Issue: Can a sole arbitrator be unilaterally appointed by a party interested in the outcome of the dispute?
Supreme Court- Applicant argued that the CMD could not have appointed the sole arbitrator. The Applicant relied on the Fifth & Seventh Schedules of the Act to advance this argument. The Fifth & Seventh Schedules flow from S. 12 of the Act, which provides for grounds of challenge to an arbitrator.

The Fifth Schedule lists out circumstances, which give rise to justifiable doubts as to the independence or impartiality of arbitrators. Under S. 12 (5), if the relationship of an arbitrator falls within the list in the Seventh Schedule, the arbitrator would be ineligible to be appointed as an arbitrator.

Both the Fifth & Seventh Schedules include in its scope a scenario where the arbitrator is a manager, director or part of the management in one of the parties. Evidently, the CMD would fall foul of the Section 12 read with the Fifth & Seventh Schedules if he was appointed an arbitrator.

The Supreme Court relied on its previous decision of Trf Ltd vs Energo Engineering Products and held that a person who is himself ineligible to act as an arbitrator cannot have the sole power of appointment of arbitrator, and hence the sole arbitrator appointed by the Chief Managing Director, who is an interested party to the dispute will be ex- facie invalid in terms of the 5th and 7th schedule of The Arbitration and Conciliation Act, 1996.

This decision will have a significant impact on the arbitration landscape in our country, especially on government contracts which contain one sided arbitration clauses.

Prodattur Cable Tv DIGI Services Vs SITI Cable Network Ltd[5]:

Facts:
There was a distribution agreement entered into between the parties, disputes arose between the parties, amicable resolution failed and the arbitration clause was invoked by the Petitioner herein. Respondent appointed a sole arbitrator unilaterally for adjudicating disputes. Petitioner challenged the same in the High Court of Delhi by filing a petition under Section 14 and 15 of The Arbitration and Conciliation Act, 1996.

Issue:
Can unilateral appointment of arbitrator by party interested in outcome of dispute this case the respondent company be sustained in the light of the amendment of, in The Arbitration and Conciliation Act, 1996 and the Perkins judgement?

Delhi High Court:
The Hon'ble Court held that in light of the Perkins Judgement it is absolutely clear that unilateral appointment of party interested in outcome of dispute cannot be sustained as per Section 12(5) of The Arbitration and Conciliation Act, 1996. The argument of the Respondent that since the company is acting through its Board of Directors does not hold any weight. The Board of Directors is the controlling unit of a company, and therefore such unilateral appointment by them is invalid.

Voestapline Schien GMBH v/s DMRC ( The Meaning And Scope Of Unilateral Appointment Is Explained [6])

Facts: Petitioner is an Australian company engaged in the business of steel production and other allied activities. Disputes arose between the parties and arbitration clause was revoked. The respondent forwarded a list of names of ex railway officials and other retired PWD officials to the Petitioner from which it was required to select names. Petitioner was not satisfied with this procedure and sought appointment of an independent tribunal by filing a petition under Section 11 of The Arbitration and Conciliation Act, 1996.

Issue: Whether the procedure of the respondent for selection of arbitration tribunal amounted to unilateral appointment, and hence the appointments would be repudiated?

Supreme Court:
The Petitioner contended that selection from a panel of retired railway and government engineers was an abrogation of the ethos of The Arbitration and Conciliation Act, 1996 and such arbitrators could not be said to be independent and impartial, and hence such appointment was not valid as per Section 12 of The Arbitration and Conciliation Act, 1996.

The Respondent, through Attorney General Mr.Mukul Rohatgi contended that employing of retired railway and PWD engineers was not an abrogation of Section 12, as none of these people are advisors or employees of the Respondent, DMRC.

The Supreme Court said that in this case the appointment of the arbitral tribunal was not unilateral as the Petitioner was also given choice of arbitrators to be appointed, and since the tribunal was to be formed as per mutual concurrence it was not a unilateral appointment. In addition to this the Court held that employing retired railway and PWD engineers, who are in no way connected to the DMRC does not amount to a bar under Section 12 of The Arbitration and Conciliation Act, 1996.

Conclusion
There is nothing which is more finely perceived and felt as injustice said Dickens and unilateral appointment of arbitrators is nothing but a travesty of justice as it seeks to impose upon the other a adjudicator usual to the unequal bargaining terms between the parties to the contract. Law exists for the purpose of ensuring that the bigger fish do not swallow the smaller fish (also known as Matsyanayana in Indian Jurisprudence), and therefore the Parliament and the Courts have to a great extent managed to stymie the unilateral appointment of arbitrator by parties to the contract.

The Supreme Court has gone a step further and has held in Perkins that unilateral appointment by any party interested in the outcome of the dispute will be invalid. This is a highly significant observation and must be applauded as the Supreme Court has not only curtailed unilateral appointment by parties to the contract, it has rather extended the ban to any person interested in the outcome of the dispute between the parties.

However we must remember that unilateral appointment has not been banned in toto, unilateral appointment can be done by neutral parties, such as arbitration institutes and other arbitration bodies. The above rulings of the Supreme Court of India which are being followed by the High Courts will play a major role in improving the arbitration landscape in this country and help in making India an arbitration friendly jurisdiction.

End-Notes:
  1. Appeal (civil) 7140 of 2004
  2. Arbitration Petition No. 121 of 2012
  3. (2017) 8 SCC 377]
  4. (2019) 2 SCC 271
  5. O.M.P (T) (COMM.) 109/2019.
  6. 2017 SCC 172

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